Monday, June 30, 2014

Varieties of Keynesianism

Here’s something interesting from Axel Leijonhufvud. It’s a response to Luigi Pasinetti’s book on Keynes, but really it’s an assessment of the Keynesian revolution in general.

There really was a revolution, according to Pasinetti, and it can be dated precisely, to 1932. Leijonhufvud:

By the Spring of that year, Keynes had concluded that the Treatise could not be salvaged by a revised edition. He still gave his “Pure Theory of Money” lecture series which was largely based on it but members of his ‘Circus’ attended and gave him trouble. The summer of that year appears to have been a critical period. In the Fall, Keynes announced a new series of lectures with the title “The Monetary Theory of Production”. The new title signaled a break with his previous work and a break with tradition. From this point onward, Keynes felt himself to be doing work that was revolutionary in nature.

What was revolutionary about these lectures was that they weren’t about extending or modifying the established framework of economics, but about adopting a new starting point. A paradigm in economics can be thought of as defined by the minimal model — the model that (in Pasinetti’s words) “contains those analytical features, and only those features, which the theory cannot do without.” Or as I’ve suggested here, the minimal model is the benchmark of simplicity in terms of which Occam’s razor is applied.

For the orthodox economics of Keynes’s day (and ours), the minimal model was one of “real exchange” in which a given endowment of goods and a given set of preferences yielded a vector of relative prices. Money, production, time, etc. can then be introduced as extensions of this minimal model. In Keynes’ “monetary production” model, on the other hand, the “analytical features which the theory cannot do without” are a set of income flows generated in production, and a set of expenditure flows out of income. The minimal model does not include any prices or quantities. Nor does it necessarily include exchange — it’s natural to think of the income flows as consisting of profits and wages and the expenditure flows as consumption and investment, but they can just as naturally include taxes, interest payments, asset sales, and so on.

I don’t want to suggest that the monetary production paradigm has ever been as well-defined as the real exchange paradigm. One of Leijonhufvud’s main points is that there has never been a consensus on the content of the Keynesian revolution. There are many smart people who will tell you what “Keynes really meant.” With due respect (and I mean it) I’m not convinced by any of them. I don’t think anyone knows what Keynes really meant —including Keynes himself. The truth is, the Hicks-Patinkin-Samuelson version of Keynes is no bastard; its legitimate paternity is amply documented in the General Theory. Pasinetti quotes Joan Robinson: “There were moments when we had some trouble in getting Maynard to see what the point of his revolution really was.” Which doesn’t, of course, means that Hicks-Patinkin-Samuelson is the only legitimate Keynes — here even more than in most questions of theory, we have to tolerate ambiguity and cultivate the ability to hold more than one reading in mind at once.

One basic ambiguity is in that term, “monetary production.” Which of those words is the important one?

For Pasinetti, the critical divide is between Keynes’ theory of production and the orthodox theory of exchange. Pasinetti’s production-based Keynesianism

starts from the technological imperatives stemming from the division and specialization of labor. In this context, exchange is derivative, stemming from specialization in production. How it is institutionalized and organized is a matter that the minimal production paradigm leaves open (whereas the exchange paradigm necessarily starts by assuming at least private property and often also organized markets). Prices in the production paradigm are indices of technologically determined resource costs and, as such, leave open the question whether the system does or does not have a tendency towards the full utilization of scarce resources and, in particular, of labor. …

The exchange paradigm relies on individual self-interest, on consumer’s sovereignty, and on markets and private property as the principal institutions needed to bring about a socially desirable and harmonious outcome. In putting the division of labor and specialization at center stage, the pure production model, in contrast, highlights the “necessarily cooperative aspects of any organized society…

To an unsympathetic audience, I admit, this could come across as a bunch of commencement-speech pieties. For a rigorous statement of the pure production paradigm we need to turn to Sraffa. In Production of Commodities by Means of Commodities he starts from the pure engineering facts — the input-output matrices governing production at current levels using current technology. There’s nothing about prices, demand, distribution. His system “does not explain anything about the allocation of resources. Instead, the focus is altogether on finding a logical basis for objective measurement. It is a system for coherent, internally coherent macroeconomic accounting.”

In other words: We cannot reduce the heterogeneous material of productive activity to a single objective quantity of need-satisfaction. There is no such thing. Mengers, Jevons, Walras and their successors set off after the will-o-the-wisp of utility and, to coin a phrase, vanished into a swamp, never to be heard from by positive social science again.

The question then is, how can we consistently describe economic activity using only objective, observable data? (This was also the classical question.) Sraffa answers in terms of a “snapshot” of production at a given moment. Or as Sen puts it, in a perceptive essay, he is showing how one can do economics without the use of counterfactuals.

For Pasinetti, Keynes’ revolution and Sraffa’s anti-subjectivist revival of classical economics — his effort to ground economics in engineering data — were part of the same project, of throwing out subjectivism in favor of engineering. Leijonhufvud is not convinced. “Keynes was above all a monetary economist," he notes, "and there are good reasons to believe” that it was monetary and not production that was the key term in the “theory of monetary production.” Keynes made no use of the theory of imperfect competition, despite its development by members of his inner circle (Richard Kahn and Joan Robinson). Or consider his famous reversal on wages — in the General Theory, he assumed they were equal to the marginal product of labor, which declined with the level of output. But after this claim was challenged Dunlop, Tarshis and others, he admitted there was no real evidence for it and good reason to think it was not true. [1] The fact that JMK didn’t think anything important in his theory hinged on how wages were set, at least suggests that production side of economy was not central to his project.

The important point for us is that there is one strand of Cambridge that rejects orthodoxy on the grounds that it misrepresents a system of production based on objective relationships between inputs and outputs, as a system of exchange based on subjective preferences. But this is not the only vantage point from which one can criticize the Walrasian system and it’s not clear it’s the one occupied by Keynes or by Keynesianism — whatever that may be.

The alternative standpoint is still monetary production, but with the stress on the first word rather than the second. Leijonhufvud doesn’t talk much about this here, since this is an essay about Pasinetti. But it’s evidently something along the lines of Mehrling’s “money view” or “finance view.” [2] It seems to me this view has three overlapping elements: 1. The atomic units of the economy are money flows (and commitments to future money flows), as opposed to prices and quantities. 2. Quantities are quantities of money; productive activity is not measurable except insofar as it involves money payments. 3. The active agents of the economy are seeking to maximize money income or wealth, not to end up with some preferred consumption basket. Beside Mehrling, I would include Minsky, Paul Davidson and Wynne Godley here, among others.

I’m not going to try to summarize this work here. Let me just say how I’m coming at this.

As I wrote in comments to an earlier post, what I want is to think more systematically about the relationship between the network of financial assets and liabilities recorded on balance sheets, on the one hand, and the concrete social activities of production and consumption, on the other. What we have now, it seems to me, is either a “real” view that collapses these two domains into one, with changes in ownership and debt commitments treated as if they were decisions about production and consumption; or else a “finance” view that treats balance-sheet transactions as a closed system. I think the finance view is more correct, in the sense that at least it sees half of the problem clearly. The "real" view is a hopeless muddle because it tries to treat the concrete social activity of production and consumption as if it were a set of fungible quantities like money, and to treat money commitments as if they were decisions about production and consumption. The strength of the finance view is that it recognizes the system of contingent money payments recorded on balance sheets as a distinct social activity, and not simply a reflection of the allocation of goods and services. To be clear: The purpose of recognizing finance as a distinct thing isn’t to study it in isolation, but rather to explore the specific ways in which it interacts with other kinds of social activity. This is the agenda that Fisher dynamics, disgorge the cash, functional finance and the other projects I’m working on are intended to contribute to.

[1] It’s a bit embarrassing that this “First Classical Postulate,” which Keynes himself said "is the portion of my book which most needs to be revised," is the first positive claim in the book.

[2] Mehrling prefers to trace his intellectual lineage to the independent tradition of American monetary economics of Young, Hansen and Shaw. But I think the essential content is similar.

14 comments:

I did recently read "Production of Commodities by Means of Commodities". You say that

"For a rigorous statement of the pure production paradigm we need to turn to Sraffa. In Production of Commodities by Means of Commodities he starts from the pure engineering facts — the input-output matrices governing production at current levels using current technology. There’s nothing about prices, demand, distribution."

I think that this isn't 100% correct. It is true that Sraffa assumes that relationships between base commodities (that, in the sense used by Sraffa, basically means capital goods) can be expressed as a set mof proportions caused by technical reasons. It is also true that the output ratio of this system can be described without reference to distribution between wages and profits. However Sraffa then goes on to calculate the price of the various commodities using these two assumptions:1) the wage rate (or if you prefer the cost of labor) is constant throgout the system;2) the profit rate is constant throgout the system.

So I don't think that there is nothing about prices and demand, rather, Sraffa is assuming that the market is in equilibrium, like Marx with the LTV.In fact, it seems to me that Sraffa's book is an attempt to solve the "transformation problem", and I think that Sraffa's model should be regarded as a LTV model (I did read some articles on blogs about the relationship between Marx and Sraffa, but generally found those articles unsatisfacting or unconvincing, because they speak of the differences between Marx's and Sraffa's models and wether Sraffa proves Marx right or proves Marx wrong, whereas from my point of view it is exactly the same model, Sraffa just explained some details much better and ignored others).

It is true tough that Sraffa's approach completely ignores money and credit. It is also true that his model shows that the output ratio of the system is independent from non base commodities, where non base commodities actually are consumption goods - so if by "consumer preferencies" we mean choice between consumption goods, the real profit rate is not dependent on it (although this works only if we don't take in account subsistence wages as a minimum fllor for the wage rate).

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In my opinion, if we want a bridge between a Sraffian "real economy" model, and a Keynesian/monetarist model, the direction should be this:

1) In a Sraffian model, the "output ratio" of the model is fixed by technological constraints and doesn't depend on the wage share of output, hence it is independent by the real profit rate. However this "output" can be split between "consumption" and reproduction of the system on an increased scale. However I wonder - how realistic is it that we can increase production dy diverting resources from consumption? It seems to me that there are limits to this. In particular, consumption can never fall in absolute terms, because this would make new capital goods (and some of the present capital goods) useless.

2) If consumption must never fall, then in some situation it might happen that an increase in lending is necessarious to keep consumption at a minimum level. In this situation lending ultimately subsidizes consumption, but this doesn't divert resources from production to consumption; it just prevents resources to be wasted.

3) But an increase in lending means the creation of new "financial capital" and there is no reason (IMHO) to think that this financial capital has a "real" counterpart.

4) various financial and monetary phenomena can influence this "financial capital" stuff.

5) but the crux of the problem is still wether all the consumption goods are consumed or not, and I think this is mostly a distributional problem.

"The strength of the finance view is that it recognizes the system of contingent money payments recorded on balance sheets as a distinct social activity, and not simply a reflection of the allocation of goods and services."

I'm so with you. One important way to get at that, I think, is to make a crucial distinction that Piketty (and pretty much everyone else) fails to make: between wealth and real capital. (He explicitly uses wealth and capital synonymously.) Wealth consists of *claims* on real capital -- financial assets (which are nothing more than legal claims).

The ratio of W to K can vary enormously over very long periods, depending on how much of K is indebted. And the distribution of W can vary and change significantly relative to the distribution of K. Think, for just one example: the runup in student loan debt -- claims against those former students real human capital.

Yes. Although I would go a step further. There is no such thing as a scalar quantity "K", independent of financial claims. Over here, there is the whole range of human productive activity, making use of a variety of means of production. We can summarize changes in productive activity in various ways -- industrialization, etc. -- but in itself it cannot be reduced to some homogeneous quantity. Then, over there, there is a network of money claims and payments. Some of these claims and payments are associated with productive activity, many others are not. Where the money system comes into contact with productive activity, the various components of production are assigned money values and become quantitatively comparable -- but only insofar as they give rise to money payments. It is true, and important, that the social activity of, say, writing software is not the same as the legal title to money payments that result from that activity. But only the latter is a measurable quantity.

So in one sense, I agree that "financial capital" is an oxymoron. But in another sense, it's the only kind of capital there is.

Amazing how much I agree with most of the above. The above statement is absolutely right. But I disagree completely.

Just because something cannot be measured, does not mean it doesn't exist. That's what I think you're asserting: Capital can't be measured, summed up, in financial/dollar terms, so it doesn't exist.

Real capital exists even if we cannot measure it (very accurately) -- by market/financial-asset value, indebtedness, or any other means.

This is exactly the logical flaw that lies at the heart of modern price theory, since it abandoned any consideration of cardinal/absolute utility and reduced the conversation to "preferences," ordinal utility.

Since absolute utility can't be measured, it doesn't exist.

Steve Waldman as always said it much better than I in his latest brilliant series:

"When economics tried to put itself on a scientific basis by recasting utility in strictly ordinal terms, it threatened to perfect itself to uselessness."

Just to add: Price theory's refusal to consider absolute utility is at the very core of modern economics' regressive political stance. Buying into that is logical suicide for a Marxist/progressive thinker.

Also, I don't think it's useful to speak of capital as a flow thing, as you seem to do here. Any concept of "capital" must be a stock, increased and decreased by flows of production and decay etc.

Sure, you can confute the two realms you talk about here, equating the *value* of real capital as a function of future (measurable?) production from that capital. So the future flow determines the value of the present stock. But that doesn't make the actual stuff, the real capital, a flow.

Just because something cannot be measured, does not mean it doesn't exist. That's what I think you're asserting: Capital can't be measured, summed up, in financial/dollar terms, so it doesn't exist.

I can’t see how you get that from what I wrote. But let’s set aside what I’m saying, I want to figure out what you’re saying.

Real capital exists even if we cannot measure it (very accurately) -- by market/financial-asset value, indebtedness, or any other means.

What does it mean to say that capital exists independently of its value? And is this the quantity of this physical capital imprecisely measurable, or not measurable at all?

This is exactly the logical flaw that lies at the heart of modern price theory, since it abandoned any consideration of cardinal/absolute utility and reduced the conversation to "preferences," ordinal utility.

Just so I understand what you’re saying: I had dinner with some friends on Friday. On Sunday, I took my kid to the park. Both experiences made me happy. Now, are you saying there exists, out in the world, an objective quantity of happiness that was increased by, say 75% more by the trip to the park than by dinner? Is this quantity measurable in some way? Are you saying there’s an objective scale on which all human experiences can be assessed in terms of goodness or badness? Or that we should be constructing such a scale? or pretending that there is one? What does “absolute/cardinal utility” means operationally?

"When economics tried to put itself on a scientific basis by recasting utility in strictly ordinal terms, it threatened to perfect itself to uselessness."

What value do you see in the idea of utility, ordinal or otherwise? Why not just throw out the whole concept?

Also, just as a historical matter, it's wrong to say that utility was "recast" in ordinal terms. The concept was introduced into economics in order to found value on incommensurable subjective preferences. It's been ordinal since day one.

"What does it mean to say that capital exists independently of its value?"

If I build a drill press or a house, it exists. If I learn a skill, it exists. Its existence is utterly independent, conceptually, from its value.

"And is this the quantity of this physical capital imprecisely measurable, or not measurable at all?"

I would say somewhere in between, depends on the thing, but in aggregate somewhat closer to the latter.

"Now, are you saying there exists, out in the world, an objective quantity of happiness that was increased by, say 75% more by the trip to the park than by dinner?"

Let's try another example. You buy an operation for your mother, or your daughter, that causes them to live some decades longer. Larry Ellison buys a fourth Maserati for his collection.

Is there "an objective quantity of happiness that was increased" more by your purchase than by his, even though you each revealed equal "willingness to pay"?

I would say yes, absolutely. I can't really imagine a convincing counterargument.

Is that difference measurable, in monetary/dollar terms, or any other fixable unit of measurement? I can't think how. Does that mean the difference doesn't exist? I can't see how it can mean that.

"Objective" ≠ "Measurable".

"Or that we should be constructing such a scale?"

That is exactly what we are doing whenever we do politics, create laws and institutional rules.

By pretending to objectivity and positivism by eschewing/ignoring cardinal utility, economics positions and imprisons itself in a very particular (and powerful!) quadrant of that political debate -- a quadrant where Ellison's Maserati must have the same value as your daughter's operation.

"it's wrong to say that utility was "recast" in ordinal terms"

I said "strictly" ordinal terms. Discussion of cardinal utility was banned from the lexicon as non-positivist, non-empirical, and non-worthy of discussion in academic economics arguments. That was not true prior to mid-20th-century formulation of modern price theory, certainly not in the days of classical economics.

>"Why not just throw out the whole concept?"

Because it's a useful concept, and could actually even be studied and roughly quantified if economists would adopt the appropriate empirical tools of social science. Surveys and experiments and such, cleverly designed, could give real, objective insights into the operation-vs.-Maserati question. Perfect quantification? Of course not. Some rough measures and valuations that would at least demonstrate the obvious? Sure.

Some ideas that came to me because of this and the previous post (in various comments because it is long):

Using K for physical capital (factories, raw material, tools etc.) and W for wages, and C as total capital (C=K+W).

If we assume that the rate of profit is somewhat uniform across all industries, we mean that the rate of profit for C is the same, not that the rate of profit for K is the same, unless all industries have the same "capital intensity".

We know that different industries have different "capital intensity", and that this is a technological ratio.

For example, suppose that a company uses trucks for long haul delivery business, whereas another company uses scooters for suburban delivery;

The first company will have a more or less fixed ratio of truck drivers to truck (say, 2 drivers per truck). Changes in the wage of truck drivers cannot change this ratio that much (you will never have 50 drivers per truck, or 1 driver per 50 trucks).

The second company will have also a somewhat fixed ratio of one driver per scooter.

If we assume that wages are more or less the same for scooter drivers and for truck drivers, and that we can say that a truck represents more capital than a scooter, and that this is reflected in the price of scooter and trucks, we will have something like:[assuming a rate of profit of 10%]

Now, if we think that profits are produced by "K", we have this weird situation where 50$ of capital in the second industry produce the same profit than 100$ of capital in the first industry. Note that this is exactly the same thing as the so called "trasformation problem" of the LTV:In Marx's story, as a first appoximation all profits are produced by W, but then you have to explain how is this that the first company workers are so much more productive than second company workers.

Thus the same problem arises whether we use an LTV or if we say that all workers get their marginal productivity as wages (which implies that all profits are the productivity of K). The problem only arises when we assume that in different industries there are hard technical relationships between the quantity of workers employed and the quantity of capital used.

Sraffa's model, which as far as I can undersand is an attempt to solve the "trasformation probem", is as a consequence also an attempt to solve this "K vs C" problem, and in fact starts from this kind of hard technical relationships.

In a comment above you say: "Where the money system comes into contact with productive activity, the various components of production are assigned money values and become quantitatively comparable -- but only insofar as they give rise to money payments."

I think that this sentence mixes three different problems: on one hand, you have a "forward looking" concept of capital as, basically, the price of a future cashflow. On the other, you have the idea that different kinds of productive activity and stuff can only be compared through prices . Third there is the idea that a large part of productive activity simply falls out of the economy.

With regard of the second problem, if really we can only compare economic quantities only as "prices":

Let's see the problem of capital intensity with the example of my two companies above. Let's define capital intensity as the ratio K/C.

Company 1 has 100K and 50 W, so its capital intensity is:100/(100+50) = 67%.Company 2 has 50 K and 100 W, so its capital intensity is:50/(50+100) = 33%.

Suppose that wages fall from 5$/h to 4$/h, and suppose that the cost of trucks and scooters stays the same. The new capital intensities would be:

1): 100/(100+40) = 71%2): 50/(50+80) = 38%

First we see that the "capital intensity" is just an apparent quantity if measured in prices, second we see that if the wage rate falls different firms have different increases in the capital intensities. However we still are assuming the technical relationships of one man per scooter, two men per truck.But in the real world, if the wage rate falls, then likely also the price of scooters and truck will fall.If we assume that the fall in wages is not just nominal but is in real (or, better, relative) terms, we can describe it as a fall in the wage share of total production.This leads us directly to Sraffa's model, and in short, while Sraffa build a very complex model where the price of the capital goods is dependent on the total net of relationships between the various capital goods and labor, in general when the wage share falls, this "apparent capital intensity" decreases (though it decreases differently for various types of capital).But, can't we speak of an "absolute" measure of capital intensity?We could pick a certain level of the wage share as a baseline and calculate all intensities at that level. If we pick a wage share of production of 100%, If I understand Sraffa correctly, all prices become proportional to the quantity of "labor embodied", and thus we can calculate absolute capital intensity in terms of labor values, as per Marx.

I think we could also define the absolute capital intensity of the whole system (in Marxian/Ricardian terms) not just as the average of the various capital intensities, but seing the system as a self reproducing process and calculating the output to capital ratio. But I'm not sure of this because I'm not sure I understand Sraffa correctly.

On the second problem, the difference between a "future looking" view of capital as the price of future expected cashflows, and a "cost of production" view of capital as the cost of producing gapital goods, plus the cost of wages.

In Sraffa's model, the price of stuff can be said to depend on the past labor, discounted by time (so older labor costs less than present labor) depending on the profit rate.

However, Sraffa's model assumes equilibrium, both in the labor market and in the capital market (same wage rate and profit rate throghout the economy).

But markets do not possess infinite calculation powers, so we must assume that they reach this equilibrium through successive iterations (I learnt this nice term reading about Okishio in wikipedia), while verious businesses and workers try to get the higest wages and profits that they can get. The equilibrium changes in time as technology changes or the wage share changes.

Thus, while if the market was in equilibrium the "future looking" evaluation of the price of capital and the "price of production" evaluation of capital are equal, in reality the actual market price is the "future looking" one, that bounces around the "cost of production" one.

My gut feeling is that during this iterative bouncing, the wage share tends to fall (which in itself changes the equilibrium point).

There are a few things that influence the cashflows, and thus the "future looking" evaluation of capital, that IMHO are not captured in Sraffa's model:

1) Monopoly power - how do we integrate monopoly power in a "cost of production" view of capital? Monopoly power in my opinion comes from 4 sources:a) Ownership of scarce resources (eg: land);b) Legally enforced restrictions (such as patents), assimilable to land;c) Growing efficiencies of scale, that shut out competitors from the market. What happens if in a certain market there is a certain number of competitors, but because of scale efficiency, a smaller number of producers could produce the same quantity of stuff at lower prices? Does the variation of the apparent capital intensity as the wage rate changes influence this?d) Monopoly power due to large shares in distribuition.

2) The "realisation problem", that is, the fact that at the end of the day, most of the consumption goods produced must be sold, or an underconsumption crisis will ensue, and the fact that, as far as I can understand, an increase of debt will generally increase aggregate demand for consumption goods (which has to be constant or rising).

3) The "non-realisation problem", that is, assuming that some people are accumulating wealth, but not consuming the consumption goods (I suppose that this is balanced by the consumption "subsidised" by the increase of debt), the amount of this "financial wealth" can in theory increase indefinitely as long as the financial wealthowners recycle their interest by adding to principal (assuming that all financial wealth can be treated as credit/debt). When does this process stop?

A lot to respond to here! I will try to reply in a bit. But I have to admit, I have not read Production of Commodities by Means of Commodities since my first year of grad school, when I wasn't prepared to make use of it. (My summary here was based on Leijonhufvud, Pasinetti and Sen, not my own reading.) A friend and I are planning to work through the book seriously later this summer, and if that happens I should have more to say about it here on the blog.

Mwahahaha!I did read Sraffa with the purpose of looking intelligent, and, at a first approximation, it worked!

However, when in my comment over there i said "in general when the wage share falls, this "apparent capital intensity" decreases" I just misspoke, actually when the wage share falls "apparent capital intensity" rises (as results from my example).

As you may or may not know, Marx begins Capital with a discussion of exactly these issues. We are surrounded by commodities, which have a strange double nature. On the one hand, they have all their own distinct qualities: the house is located at a certain address, has so many rooms, is made of certain materials; the drill press is heavy, needs electricity and ... makes holes? squashes things? (I'm not very handy.) These qualities allow them to satisfy various human needs, but in themselves don't seem to have any quantitative aspect. Looking purely at the physical objects, asking "how many drill presses equal a house?" is a nonsense question. but all these objects also have a second property, which is that they carry an invisible -- but very consequential -- social label indicating how much they cost (and who currently owns them). Figuring out what exactly is the relationship between these two natures of commodities -- use value and exchange value -- is the starting point of Marx's analysis.

I don't bring this up because I expect you to defer to Marx's authority, but just to try to clarify what the problem is here that I am trying to think about. We actually live in a world governed by money values, and I want to understand how those values arise and how they interact with the rest of social reality. In other words: There really is a quadrant in which Ellison's Maserati is worth more than my (hypothetical) daughter's operation. In fact, we live in that quadrant. I want to get out of it. But to do that, we have to map it accurately, we have to understand its contours, its boundaries, where it is solid and where there are gaps or weak points. Like the fly in the bottle.